Taxation of the digital economy: Creating legal and administrative security

For several years now, countries have been struggling at the OECD level to realign global taxation principles for the digitized economy, as the currently prevailing correlation with immobile business equipment is no longer considered appropriate in times of purely digital business models that no longer require a physical presence in the markets.

The VDA is committed to a consistent worldwide tax system based on the premise that stability, certainty, and uniformity in global tax principles are essential for business and will promote cross-border trade and investment. We recognize the OECD's efforts to allow countries belonging to the Inclusive Framework to cooperate in developing a solution for their final report to the G20 by mid-2021. A consensus-based solution is crucial for companies in the German automotive industry, which exports many of its products.

In 2020, the value of cars and parts exported from Germany (under corona conditions) amounted to 187 billion euros, accounting for the largest percentage of the country's export volume. The supply chains in the automotive industry are globally interconnected. In addition, the business models among German automotive manufacturers and suppliers are changing and digitizing rapidly, as companies have to adapt to future mobility requirements. Major trends here include urbanization, increasing mobility in fast-growing market economies, an ever greater flow of goods, the interconnectivity of transport modes, new means of use, as well as the need to make mobility sustainable. All these require considerable investment, on the part of the German automotive industry, in new technologies.

The new US administration signaled significantly better chances of a compromise in reforming the World Tax Order. A global consensus by mid-2021 is now more urgent than ever to avoid the risk of double taxation and escalating international tax conflicts. Clear and simple rules need to be found to limit additional burdens on companies.

Now the EU needs to urgently change its course: Instead of continuing to pursue additional, unilateral proposals, the EU Commission must focus all its energy on reform at the G20 and OECD levels and fully support the negotiations.

Compared to other regions around the world, Europe still lags far behind in digitized business models. The "young buds" that do exist need to be nurtured and cared for. It is not apparent how additional taxation of digitized business models in the EU can help these models to thrive in the EU, generating the growth and prosperity needed to overcome the financial impact of the Covid-19 pandemic.

The companies within the automotive industry strongly support the goal of preventing tax avoidance. However, we are convinced that this cannot be achieved by additionally taxing digitalized business models. Rather, we call on the European Commission to recalibrate current discussions and focus instead on the growth-enhancing aspects that need to be prioritized when looking for possible changes to the current (international) tax system in light of an increasingly digitalized economy. Since digitization continues to be a key driver of global economic growth and digitized business models act as centers of value creation, we are convinced that any discussions surrounding taxation of the digitized economy should promote – not hinder – growth and cross-border trade and investment.

Unilateral taxes, such as the proposed EU digital tax, equally have implications for other policy areas, especially trade. They increase the risk of tax and trade retaliation when governments respond to targeted taxation of companies headquartered within their borders. As the response to previous proposals has shown, there is bipartisan opposition in the USA to discriminatory digital levies, the imposition of which could lead to retaliation. The USA has already initiated trade investigations under Section 301 against the EU and a number of EU countries with regard to the imposition of digital tax levies, while the Biden administration has stated that it will respond if countries continue to demand unilateral digital taxes. The German automotive industry is highly dependent on free and smooth trade. A further threat to its global value chains, which have already come under pressure in recent years for various reasons (customs threats, sanctions, border closures due to Covid-19, Brexit, supply bottlenecks), must be avoided at all costs.